Show Me the Money: What You Can Actually Recover in Investment Fraud Cases

When your broker or financial advisor screws up, your first question is probably: “Can I get my money back?” The answer depends on several factors, including the type of misconduct, the strength of your case, and the financial condition of the wrongdoer.

Let me explain what types of damages you might be able to recover and how they’re calculated.

Types of Recoverable Damages

Out-of-pocket losses – This is the money you actually lost due to the misconduct. For example, if you invested $100,000 and it’s now worth $60,000 due to unsuitable recommendations, your out-of-pocket loss is $40,000.

Lost opportunity costs – This is what you could have earned if your money had been invested properly. If a suitable investment would have grown to $120,000 during the same period, you might be able to recover the difference.

Interest – You can often recover interest on your losses from the time they occurred until you’re paid back.

Costs and fees – In some cases, you can recover attorney fees, expert witness costs, and other litigation expenses.

How Damages Are Calculated

The “but for” test – What would have happened “but for” the broker’s misconduct? This involves comparing your actual results to what would have happened with suitable investments.

Market benchmarks – Your damages might be calculated by comparing your returns to appropriate market indices or benchmarks.

Specific alternative investments – If your broker should have recommended specific alternative investments, damages might be based on how those would have performed.

Factors That Affect Your Recovery

Causation – You need to prove that the broker’s misconduct actually caused your losses, not just market conditions.

Mitigation – You have a duty to minimize your losses once you discover the misconduct. Continuing to hold unsuitable investments after you know they’re wrong can reduce your recovery.

Comparative fault – If you contributed to your losses through your own actions, your recovery might be reduced.

Statute of limitations – Waiting too long to file your claim can eliminate or reduce your recovery.

What You Usually CAN’T Recover

Punitive damages – These are rare in FINRA arbitration, though they’re sometimes available in court.

Pain and suffering – Investment cases typically don’t include emotional distress damages.

Consequential damages – Indirect losses (like having to sell your house) are usually not recoverable.

Speculative profits – You can’t recover profits from investments you never made.

The Reality Check

Here’s the hard truth: even if you win your case, you might not recover 100% of your losses. Several factors can reduce your actual recovery:

The wrongdoer’s ability to pay – You can’t get blood from a stone. If your broker doesn’t have money or assets, even a large arbitration award might be worthless.

Settlement negotiations – Most cases settle for less than the full amount of damages to avoid the uncertainty of arbitration.

Legal costs – Attorney fees and expenses reduce your net recovery, even in contingency fee cases.

Time value of money – Getting your money back years later isn’t the same as having it today.

Maximizing Your Recovery

Act quickly – The sooner you discover and address misconduct, the better your chances of recovery.

Document everything – Keep detailed records of all communications, statements, and losses.

Stop the bleeding – Don’t continue to follow bad advice once you realize there’s a problem.

Get professional help – Experienced attorneys know how to calculate and prove damages effectively.

Consider all responsible parties – Sometimes multiple parties (broker, firm, supervisor) can be held liable.

Special Considerations for Different Types of Cases

Churning cases – Damages often include excessive fees and lost opportunity costs from frequent trading.

Unsuitable investment cases – Recovery typically involves the difference between what you lost and what you would have made in suitable investments.

Unauthorized trading cases – You might be able to recover the full amount of unauthorized losses.

Ponzi scheme cases – Recovery depends on how much money is available and where you stand in line with other victims.

The Role of Expert Witnesses

Calculating damages in investment cases often requires expert testimony from:
– Economists who can calculate lost opportunity costs
– Investment professionals who can identify suitable alternatives
– Accountants who can analyze financial records and tax consequences

These experts can be expensive, but they’re often essential for proving significant damages.

Settlement vs. Arbitration

Most investment fraud cases settle before going to arbitration. Settlement offers several advantages:
– Certainty of recovery
– Faster resolution
– Lower legal costs
– Privacy

But settlements typically involve compromises. You might recover 60-80% of your damages through settlement rather than risk getting nothing at arbitration.

Tax Implications

Investment fraud recoveries can have complex tax consequences:
– Some recoveries might be taxable as income
– Others might be treated as return of capital
– You might be able to claim theft loss deductions
– Timing of recovery can affect which tax year is involved

Consult with a tax professional about the implications of any recovery.

Insurance and Other Recovery Sources

Sometimes there are additional sources of recovery beyond the individual wrongdoer:
– SIPC insurance for brokerage firm failures
– Errors and omissions insurance carried by investment advisors
– Fidelity bonds that cover employee theft
– Firm liability for supervisory failures

Managing Expectations

While significant recoveries are possible in investment fraud cases, it’s important to have realistic expectations:
– Not all losses are recoverable
– Legal proceedings take time and money
– The wrongdoer might not have sufficient assets
– Settlement might be better than the uncertainty of arbitration

The Bottom Line

Recovery in investment fraud cases depends on many factors, but significant damages are often possible if you have a strong case and act quickly. The key is understanding what you can realistically recover and making informed decisions about how to proceed.

Don’t let the complexity of damage calculations discourage you from pursuing valid claims. An experienced securities attorney like Robert Wayne Pearce can help you understand what your case might be worth and develop strategies to maximize your recovery.

Remember: while you might not get back every penny you lost, holding wrongdoers accountable and recovering what you can is often better than doing nothing at all.